December 21, 2017 / 8:20 AM / 9 months ago

Daily Briefing: A new headache for Europe? Catalonia votes

BERLIN/LONDON (Reuters) - Two months ago, Spanish Prime Minister Mariano Rajoy sacked the secessionist government in Catalonia and called for a new election there, hoping it would vault unionists into power and return the rebel region to a semblance of normality.

A man stands in front of a sign in the main press center for tomorrow's regional elections in Barcelona, Spain December 20, 2017. REUTERS/Eric Gaillard

That vote is finally upon us – but will it deliver the result Rajoy wants? The most likely scenario is a hung parliament leading to weeks of wrangling to form a government. But polls suggest there is a decent chance that separatists could win a new majority. That could unsettle financial markets and cast a long shadow over Spanish national politics.

For Europe, struggling with Brexit, an east-west split and political limbo in powerhouse Germany, it would be a most unwelcome pre-Christmas present. We should get the first exit polls around 8 p.m. local time.

We can also expect more fallout from the European Commission's decision on Wednesday to take unprecedented action against Poland for judicial reforms it believes are undermining democracy.

After two years of sniping between Brussels and Warsaw, the Polish government has now been given three months to change tack or face the "nuclear option" of having its EU voting rights suspended. It has shown no signs of backing down.

Within hours of the announcement from Brussels, the Polish president signed into law the controversial bills to overhaul the judiciary. Poland knows it can count on the support of eastern European allies like Hungary to thwart EU sanctions.

Perhaps fittingly, one of the EU's other favourite punching bags, British Prime Minister Theresa May, is due to visit Poland on Thursday, a day after she forced her deputy, Damian Green, to resign for misleading statements in a pornography scandal.

For May, the relief of clinching a long-awaited deal with Brussels last week to move Brexit talks forward, appears short-lived.

MARKETS AT 0755 GMT

President Trump has delivered his “big beautiful tax cut” but his Christmas present has not brought much cheer to stocks and a lot of pain to bond markets.

Treasury yields hit nine-month highs – on expectations that the flagship tax overhaul will give a leg-up to already robust growth, to inflation and also to Treasury issuance as the deficit grows, though year-end fund adjustments may also be playing a role.

The rise in 10-year yields has lifted the 2-10 U.S. bond curve to the steepest since Nov 30 while 30-year yields touched five week highs.

Yields have slipped slightly off those levels now and European government bonds may also experience a bit of relief – but markets are finely poised, with elections in Spain’s Catalonia likely to deliver either a hung parliament or a majority for pro-independence parties. But is this the big bond selloff? Probably not, given central banks' dedication to the slow-and-steady mantra - BOJ today and the Swedish Riksbank’s dovish taper yesterday. But watch this space. 

For stocks, the bill would be good news but Wall Street has duly marked new record highs in recent weeks, having risen 5 percent since mid-November when the house passed the first version. So yesterday’s moves were more of “sell the fact” with a lacklustre close on Wall Street while Asia was mostly flat and European stocks set for flat openings.

MSCI’s world index is inching off record highs for the third day in a row.

editing by John Stonestreet

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